Q4 2022 Peabody Energy Corp Earnings Call
Speaker 1: to an anticipated rebound in economic growth.
Speaker 1: In the United States, overall electricity demand increased more than 3% year-over-year, positively impacted by weather and economic activity. However, electricity generation from thermal coal has declined year-over-year due to coal conservation by utilities, transportation issues impacting coal deliveries, and higher renewable generation. In 2022, coal inventory is at utility to climb to approximately 6% or 5 million tons.
Speaker 1: Natural gas prices have come off due to a combination of very mild winter weather and near record gas production levels. U.S. Natural gas prices are approximately $2.50 for MMBTU.
Speaker 1: The lowest level since January 2021.
Speaker 1: Yet the EIA is currently forecasting that the Henry Hub Natural Gas Spot Price will average approximately $3.40 per MB2 for 2023.
Speaker 1: Now moving on to the fourth quarter.
Speaker 1: Our operations generated record-free cash flow in the quarter despite ongoing recovery from heavy rains in Australia and weather-related rail disruptions in the PRB.
Speaker 1: Our seaborn thermal segment had a tious quarterly sales volume for the year as Wulpengang and Wombo bounce back from the prior quarter's heavy rains which continued into the fourth quarter, resulting in a quarterly rainfall which was about 40% higher than the historical 10-year average for the fourth quarter. The first quarter of the year was about 40% higher than the historical 10-year average for the fourth quarter.
Speaker 1: Our Seaborn Met segment benefited from 22% higher realized prices over the third quarter 2022 realizations.
Speaker 1: We successfully completed a long-we'll move at Metropolitan and are ramping back up to full production in the first quarter of 2023.
Speaker 1: in the US.
Speaker 1: PRB sales volumes were negatively impacted in a quarter primarily because of the abnormally cold weather and late December .
Speaker 1: which significantly restricted rail movements in the basin.
Speaker 1: We have two cold snaps in December .
Speaker 1: During the first one, our PRV operations only had eight or nine trains a day versus the planned 18.
Speaker 1: During the second cold snap, we only had one train a day when a team were planned.
Speaker 1: Our other US thermal mines perform well. Gateway and Bear Run produce strong volumes and ramps up as expected.
Speaker 1: While the board is open, two new pits.
Speaker 1: Enabling us to sell some higher price coal, albeit at higher cost to produce, but at much better margins.
Speaker 1: We're able to extend the life of our operations in New Mexico with a new eight-year contract extension at attractive terms.
Speaker 1: We are essentially sold out at all of our US domestic operations for 2023, and the railroads are focusing on improving service levels from last year's challenges, including weather and staffing levels. Final quick read of the city's
Speaker 1: I'm proud to say that in 2022, our company's operations had very effective reclamation efforts.
Speaker 1: In the US, we are able to reclaim 1.5 acres for every acre disturbed and 1.25 acres overall including our Australian operations.
Speaker 1: At North Guignola, we have begun the initial redevelopment effort and expect to spend approximately $120 million in 2023.
Speaker 1: Our drawing program is underway with two rigs operating 24 hours a day.
Speaker 1: to support the re-ventilation and planned re-entry to a previously sealed area called Zone B.
Speaker 1: We are commissioning the main ventilation fan.
Speaker 1: An edit targeted to start operating in the very near future.
Speaker 1: Also, orders have been placed for critical equipment, including two new continuous minors, shuttle cars, conveyors, and electrical installation equipment.
Speaker 1: As a reminder, North Caniel is a premium grade hard cooking co-along well operation in Queensland, Australia, with over 70 million tons of reserves.
Speaker 1: This operation is a grade of coking coal and is considered to be the cornerstone of coking coal feedstocks globally.
Speaker 1: North Canela is expected to meaningfully increase P-buddy's metallurgical coal production and generate approximately 25% returns at historical long-term prices in this initial phase.
Speaker 1: We continue, along with other companies, to urge the Queensland government to roll back their extreme royalty structure.
Speaker 1: This is resulting in discouraging investment in the loss of jobs and local business opportunities that we can deliver to local communities.
Speaker 1: I am proud to say we had a terrific 2022. Setting a stage for another strong year with a significantly improved balance sheet, which allows us to focus on implementing shareholder value return programs.
Speaker 1: I'll now turn it over to Mark to cover the financial details.
Speaker 1: Thanks Jim and good morning everyone. In the fourth quarter, we recorded net income attributable to common stockholders of $632 million or $3.92 per diluted share and adjusted EBITDA of $501 million.
Speaker 2: We reported record free cash flow of $580 million and had $1.3 billion of cash at December 31st after repaying all of the remaining senior secured debt.
Speaker 2: For the full year, we had record net income attributable to common stockholders of 1.3 billion, a 260% increase over the prior year.
Speaker 2: adjusted EBITDA more than doubled to 1.8 billion.
Speaker 2: Our strong financial performance allowed us to retire all $545 million of the remaining senior secured debt in the fourth quarter, completing the repayment of over $1.1 billion for the full year.
Speaker 2: Further, we are actively addressing the Reclamation Assurray Agreement to arrive at a sensible, straightforward path to pre-fund all final reclamation costs and eliminate the remaining restriction on shareholder returns.
Speaker 2: We are optimistic this will be completed in the near future.
Speaker 2: Turning now to fourth quarter and full year results.
Speaker 2: In the quarter, Seaworn Thermal recorded adjusted EBITDA of 209 million, a 22% increase over the third quarter, as export volumes increase 700,000 tons to 2.3 million.
Speaker 2: Costs per ton were 12% lower due to higher volumes and lower sales price sensitive costs.
Speaker 2: The segment generated 648 million of adjusted EBITDA for the full year, an increase of more than 80% compared to 2021.
Speaker 2: Adjusted EBITDA margin per ton more than doubled, resulting in margins of 48%.
Speaker 2: The seaborne metallurgical segment generated 188 million of adjusted EBITDA in the fourth quarter, up 66% from the prior quarter, driven by 22% higher realized pricing and 200,000 additional tons.
Speaker 2: Costs increased $14 per ton due to higher sales price sensitive costs and a long wall move at Metropolitan.
Speaker 2: For the full year, adjusted EBITDA was $782 million, up over 330% from 2021.
Speaker 2: Adjusted EBITDA margin was 48%, nearly two times that of the prior year.
Speaker 2: The US thermal mines delivered 82.5 million of adjusted ebada in the quarter and 310 million for the full year, both higher than the prior year comparable periods.
Speaker 2: The PRB mine generated 24.7 million of adjusted EBITDA in the quarter and 68.2 million for the year.
Speaker 2: The story for the fourth quarter was weather further impacting already challenging rail performance.
Speaker 2: Severe winter weather in December resulted in the loss of approximately 1.1 million tons.
Speaker 2: Together with higher Blacklong X-sized taxes from the Inflation Reduction Act, costs were temporarily higher, squeezing margins to $1.17 per tonne in the fourth quarter.
Speaker 2: The other US thermal mines generated 57.8 million of adjusted EBEDUF and 242.4 million for the year, an increase of nearly 50 percent compared to the prior year.
Speaker 2: During the quarter, we shipped 5 million tons beating prior guidance.
Speaker 2: For the year, the segment increased shipments by 1.5 million tons and improved adjusted EBITDA margins to 25 percent.
Speaker 2: Now, happily turning to the ballad sheet.
Speaker 2: At December 31st, we had 1.3 billion of cash after repaying all of the remaining senior secure debt.
Speaker 2: Accounts receivables stood at $465 million, reflecting strong fourth quarter shipments and robust realized prices.
Speaker 2: At December 31st, we had 255 million of cash margin posted for the remaining 552,000 metric tons of Wombo coal hedges that will settle in the first half of 2023.
Speaker 2: We also increased our cash collateral for final reclamation to $150 million.
Speaker 2: Let's turn to our outlook for 2023.
Speaker 2: Seaborn thermal volumes are anticipated to be 15 million tons, including 9 to 10 million export tons.
Speaker 2: Experts are increasing one and a half million tons compared to 2022 as production shifts towards higher quality Wombo tons and away from lower cost Wilpen-Young tons.
Speaker 2: Approximately 1.5 million export tons are priced on average at $206.
Speaker 2: which includes the remaining hedges at $84 per metric ton.
Speaker 2: We are expecting to ship 5.5 million tons to domestic Australian customers, inclusive of the recent New South Wales domestic supply requirements.
Speaker 2: Costs are projected to be $52 to $57 per ton, reflecting higher export tons, a greater mix of Newcastle quality Wombo tons, and higher sales price sensitive costs.
Speaker 2: While unit costs are expected to increase about $10 from 2022, we will see substantial margin expansion from the additional export tons.
Speaker 2: First quarter, see more thermal export volumes are expected to be 1.8 million tons.
Speaker 2: Less than rateable due to a long-welm move at Lambo and recovery from heavy rains in the quarter.
Speaker 2: Related costs per ton are also expected to be temporarily higher at $60-$65 per ton.
Speaker 2: B-borne metallurgical volumes are projected to be 7 to 8 million tons.
Speaker 2: an increase of nearly 1 million tons over the prior year, primarily driven by the completion of the Morviel Self Project, and Shoal Creek's continued progression through tough geological conditions.
Speaker 2: Approximately 900,000 tons are priced on average at $216.
Speaker 2: Costs are expected to remain at $120-130 per ton as lower sales price sensitive costs are offset by continued inflationary pressures.
Speaker 2: First quarter seaborn metallurgical volumes are expected to be lower than rateable at 1.4 million tons due to heavy rain in Queensland and challenging conditions that show creek.
Speaker 2: Costs are expected to be temporarily higher at $140-$150 per ton.
Speaker 2: Lastly, middle-mount results for 2023 are expected to be rateable to the just completed quarter.
Speaker 2: In the PRB, we are projecting volumes up to 95 million tons, with 92 million tons priced on average at $13.60.
Speaker 2: Costs are expected to be $11.25 to $12 per tonne, about 50 cents lower than last year as higher volume and lower strip ratio more than offset higher royalties and black long taxes.
Speaker 2: Adjusted EBITDA margins per ton are expected to double from the margins realized last year.
Speaker 2: Other US thermal volumes are expected to remain at current elevated levels of 18 to 19 million tons.
Speaker 2: We have 18.6 million tons priced at an average of $50.50.
Speaker 2: and costs are expected to be $38 to $42 per ton.
Speaker 2: Capital expenditures are estimated at 325 million, including 200 million of high-return project capital.
Speaker 2: which includes 120 million for the development of North Geniella and 40 million for the Shoele Creek Long Lock Kit.
Speaker 2: The remaining sustaining capital of 125 million is at the low end of our previously announced run rate.
Speaker 2: In summary, the company continue to generate substantial free cash flow from our unique diversified portfolio.
Speaker 2: Finish the year with 1.3 billion of cash and no secured debt.
Speaker 2: and made prudent progress toward a revised agreement with our Reclamation Security Providers.
Speaker 2: Together, Peabody has set the foundation for a financially resilient company with an unmatched opportunity to return free cash flow to shareholders.
Speaker 2: I now like to turn the call over for questions.
Speaker 3: operator.
Speaker 4: Thank you. We will now begin the question and answer session.
Speaker 4: To ask a question you may approach start on one of the touchdown thumbs.
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Speaker 4: If you have any time your question has been addressed and you would like to to withdraw your question please press star them to.
Speaker 4: And we'll take our first question from Lucas Pipes at B-Reilly Securities. Please go ahead.
Speaker 5: Thank you very much operator and good morning everyone.
Speaker 5: Jim, Jim, it sounds like first, first congratulations on the good work. And it, it sounds like you are really close to a capital return announcement. And I wondered if...
Speaker 5: You've given some thought as to what the structure could look like across the industry. We've seen frame works where almost all of the free cash loads paid out. We've seen others where 35 to 50 percent is paid out.
Speaker 5: and kind of the payout ratio stepped up as balance sheet milestones are reached. How do you think about the magnitude of capital returns once you have the final mod? Thank you very much for your perspective.
Speaker 1: Good morning, Lucas, and thank you for those kind words. We are in active negotiations right now with the charities. So we don't want to get too far ahead of ourselves with details, but we did make some comments that investor day about some of the concepts we were looking at and Mark, you want to...
Speaker 2: elaborate on some of those please. Yeah, sure good morning, Lucas. Good to be with you this morning. You know, as we mentioned in yesterday, any shareholder return program that we're looking at is certainly going to be proportional to free cash flow. And it's going to be flexible to return cash to shareholders through both buybacks and dividends.
Speaker 2: When we look at a broad spectrum of companies, reshareholder returns, programs, those companies that return the most and utilize both dividends and buybacks have performed best over time. So that's not lost on us. You know, closer to home, we like what we've seen.
Speaker 2: from some of our industry and we have a few good templates to use and improve upon. As Jim mentioned, we're not ready to share any more details with you today, but expect more in the near future.
Speaker 5: Very helpful, Jim and Mark. Thank you for that perspective. And for my second question, I wanted to turn a little bit to the domestic market. It's been roughly six weeks since natural gas prices corrected very meaningfully. And...
Speaker 5: I wonder first how has this impacted your outlook if at all and as you look to the 2024 domestic book and the PRB and other domestic thermal, how are price negotiations going, how are contract negotiations going and could you share?
Speaker 5: what you have currently priced for, and the price is possible for 2024 and the demand.
Speaker 5: Thank you very much.
Speaker 1: Lucas, so for 2023, we have a solid sales book as we stated. We are completely sold out both in the PRB and our other US thermal mind. So we have a really strong hand there. And so far, the shipments have been going.
Speaker 1: rail service in the PRB which was a challenge we had last year and has continued into the start of this year. Still with crew shortages but also there's been some tough weather in the PRB. We are expecting to to see that turnaround here in the coming months. Both railroads have additional crews coming on in February this month.
Speaker 1: So we're expecting to see some improvements in the rail performance and at the moment that really Lucas is nothing that I would say that we're seeing from the customer side, it's more of a transportation issue which is a carryover from last year.
Speaker 6: the
Speaker 1: Question you had about 2024, you know, we again have a very strong sales book for 2024 and the PRB We're sold to around 80% of that midpoint of our 2023 guidance and in our other US operations were sold around to about 60%
Speaker 1: of that midpoint of our 2023 guidance. And those were all locked in last year. And I would say, in terms of pricing, we don't discuss specific pricing going forward at that time. But since they were locked in last year, I would just say that the pricing is what we would consider to be favorable.
Speaker 5: That is super helpful. Jim Mark and your team continue best of luck.
Speaker 7: Thank you, Lucas.
Speaker 4: And ladies and gentlemen as a reminder to ask a question, please press star than one.
Speaker 4: Our next question comes from Nathan Martin at the Benzware Company. Please go ahead.
Speaker 8: Hey everyone, congrats on getting the seniors secured debt pay down and thanks for taking my questions.
Speaker 9: Good morning. Thank you.
Speaker 8: Yeah, thanks. Maybe looking at the bigger quick picture question to start, Jim, you made a couple brief comments on this in your open remarks. But how does China's reopening to Australian coal specifically affect tea body? How much of an opportunity does that possibly present to you guys?
Speaker 1: If I could, I'd like to answer that in a scope of maybe a bigger...
Speaker 1: a bigger view of the market in total, which would encapsulate Peabody and China. You know, the market in total and international markets, we've said and still are saying that there is a significant barriers to entry on the supply side. So a market demands increase.
Speaker 1: The supply side does not respond because of these high barriers to entry. Taking that into account that there is no quick supply side response, if we just start looking at the seaborn met markets.
Speaker 1: and where they are now and what the potential impact of China could be on that. You know, the prices right now are currently 88% above 2022 lows. So sitting at $380 range versus 203.
Speaker 1: And that's because demand right now is solid and is showing some signs of increasing. And in India, Japan, Korea, and even some in Europe have increased.
Speaker 1: And at this point in time in January , we had more metallurgical coal floating in the seaborne markets at any time since July of last year.
Speaker 1: So the metallurgical demand has been good and is increasing in some of these markets. Now you throw China into that mix.
Speaker 1: And then you add in the weather disruptions that have occurred in Australia, and that's why you're seeing these current prices with the strength they have, with potential for those prices to be sustained or maybe even improved depending on how quickly China gets back into the market.
Speaker 1: and starts pulling coal out of the market. Seaborn thermal, maybe we're at the opposite end at the moment in the market right now. The prices are lowest that they've been since January of last year.
Speaker 1: mainly due to the mild winters in Europe and the Eastern US. But the same NAID, the same fundamental exists. In the Seaboard market, maybe even more severe when it comes to the barriers of entry, than metallurgical cold. There's no quick supply response if at all. So we think with the growing return of normal weather.
Speaker 1: We think there's going to be growing energy demands. You see if the increase demand for metallurgical coal.
Speaker 1: with these some signs of increased energy demand, yet China into that mix, and we see the thermal prices rebounding international thermal prices rebounding later this year.
Speaker 8: Very helpful, Jim. I appreciate those comments. It may be sticking with all the operations for a second. I think you guys touched on this a little bit, but the C-born thermal cost died at 3.23. You're higher than expected up about $7-12 a year over year. You're higher than expected up about $7-12 a year.
Speaker 8: to range of 52 to 57 if my math's correct. I mean, can you be a little bit more specific around with striving that increases? Is it something in particular at Wombo or Wilpen John ? Just any additional call from the great?
Speaker 2: Yeah, Nate, it's really driven by the mix and it's really the shift of production to WAMBO, both the open-cut joint venture with Glencore as well as the underground mine in WAMBO. Again, that produces a Newcastle quality thermal coal and away from Wilpin Young. Wilpin Young is going to produce less. That's our lowest cost.
Speaker 2: financial margin expansion, given those additional export tons. And they come along with a little bit higher cost WAMBO, particularly the underground, higher cost structures, you can imagine. Also need to wash some additional coals at Wilpen Young, as well as the port and rail costs for those export tons.
Speaker 2: That's really driving it. There's some higher sales price sensitive costs as we look at realizations as well. But I'll gladly take $10 higher costs for another one and a half million export times in that margin expansion.
Speaker 8: Appreciate that Mark and then maybe all I have you you know you gave us some good guidance last quarter on the other operative cost line item. Again, I know that's kind of lumpy with trading and brokerage. You also called out I think another 200 million dollars of hedges. Looking to roll off in the first half.
Speaker 2: Any thoughts on how that line item or the hedges could look like over the next few quarters? Yeah, two things. One, remember in the first quarter of 2022, we had realized about $35 million of hedge losses. That's really just weather-related production delays and delivering some of those hedge tons.
Speaker 2: you know, later in the year. And in the third quarter, if you remember, we delivered a portion of those tons. When the average price was $420 per metric ton, versus, you know, the 264 in the first quarter, we recorded about a $27 million gain in cold trade on the third quarter.
Speaker 2: Again, in a similar fashion in the fourth quarter, we delivered the remainder of those tons when the average price was $380, so we realized another $24 million in collaterating profits in the fourth quarter. As we go into next year, we'll see in opportunities for in our blending program and our collaterated
Speaker 8: I'll leave it there for now. I appreciate the time guys. Best of luck in 23.
Speaker 8: in 23. Thanks, Dave.
Speaker 4: Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Jim Greck for any additional or closing remarks.
Speaker 1: Thank you all for joining us today. I'd especially like to thank our employees for remaining focused on safety and for continuing to execute on our various initiatives. I'd also like to thank our customers, investors, insurance providers and vendors for your continued support.